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United States General Accounting Office
GAO
Testimony
Before the Subcommittee on Readiness
and Management Support, Committee on
Armed Services, United States Senate
For Release on Delivery
Expected at 9:30 a.m. EST
Wednesday, March 19, 2003
SOURCING AND
ACQUISITION
Challenges Facing the
Department of Defense
Statement of David M. Walker
Comptroller General of the United States
GAO-03-574T
Chairman Ensign, Ranking Member Akaka, and Members of the
Subcommittee:
I am pleased to be here today to participate in the Subcommittee’s hearing
on the acquisition and sourcing practices of the Department of Defense
(DOD). Today’s hearing occurs at a critical time—with DOD on the brink
of operations in Iraq while seeking to respond to changes in security
threats and still meeting the challenge of transforming the military.
DOD spends an average of $150 billion annually on acquisitions that
support these and other missions. Moreover, this investment is expected
to grow considerably in the future as DOD works to keep legacy systems
while investing in future capabilities such as unmanned aircraft, satellite
networks, and information and communications systems.
Such demands clearly require DOD to be as efficient and effective as
possible in obtaining the systems, services, and equipment it needs to
carry out its mission. But our reviews continue to show that DOD is not
carrying out acquisitions cost-effectively and that the acquisitions
themselves are not always achieving DOD’s objectives. Pervasive
problems persist regarding high-risk acquisition strategies and unrealistic
cost, schedule, and performance estimates.
My testimony today will focus on two aspects fundamental to successful
acquisitions in DOD.
•
The first is the implementation of sound policies for making sourcing
decisions. Last April, the congressionally chartered Commercial
Activities Panel, which I chaired, and on which I was privileged to
serve along with my fellow panelists here today, Angela Styles and Pete
Aldridge, made a number of recommendations for improving the
policies and procedures governing the competitive sourcing of
commercial activities. I welcome this opportunity to discuss the work
of the Panel and the progress to date in implementing its
recommendations. These recommendations should lay a good
foundation for improving sourcing decisions within DOD.
•
The second is the adoption of best practices. DOD itself recognizes the
need to ensure that it can match its needs to its resources and to follow
a knowledge-based acquisition process. It is seeking to adopt practices
that have proven successful in the commercial sector in the
procurement of both systems and services. It also recognizes the need
to reshape its acquisition workforce to meet growing demands. Yet it
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still faces a considerable challenge in putting these practices to work
and instituting the cultural changes needed for their success. I would
like to recognize the Subcommittee’s leadership in sponsoring the work
on the best practices used by leading commercial firms in acquiring
services, information technology, and major systems, and in working to
get them accepted within DOD.
Before I begin my testimony, I would like to note that the environment in
which these changes must be made is a challenging one—not just for
DOD, but for other agencies as well. It consists of new and changing
security threats, the public’s growing expectations for demonstrable
results, demographic changes, rapidly evolving science and technology,
and serious and growing fiscal constraints. All of these challenges demand
that the federal government engage in a fundamental review of its mission
and priorities and to consider the long-term impact of the decisions it
makes today. The recommendations and practices I will be discussing
today, however, should position DOD to meet these broader challenges
since they focus on taking a more knowledge-based, and longer-term
approach to acquisitions. And they have proved successful in reducing
costs.
Improving Sourcing
Decisions
Government agencies increasingly are relying on services to accomplish
their missions. The Department of Defense now spends more than half its
contracting dollars acquiring services, about $77 billion in fiscal year 2001,
the latest year for which complete data are available. In addition, the
Department reports that it has over 400,000 employees performing
commercial-type services. Determining whether to obtain required
services using federal employees or through contracts with the private
sector is an important economic and strategic decision. In fact,
competitive sourcing is a key component of the President’s Management
Agenda. But historically, the process for determining whether the public
or the private sector should perform services needed by federal agencies –
set forth in Office of Management and Budget (OMB) Circular A-76 — has
been difficult to implement. The impact such decisions have on the federal
workforce has been profound, and there have been concerns in both the
public and private sectors concerning the fairness of the process and the
extent to which there is a “level playing field” for conducting publicprivate competitions.
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Recommendations of the
Commercial Activities
Panel
It was against this backdrop that the Congress enacted Section 832 of the
Defense Authorization Act for fiscal year 2001, which mandated that I
establish a panel of experts to study the process used by the government
to make sourcing decisions. Given the importance of this issue, I elected to
chair this Panel myself and ensured that it was comprised of highly
qualified and empowered representatives from the groups specified in the
Act and other knowledgeable individuals.
The Commercial Activities Panel conducted a yearlong study, and heard
repeatedly about the importance of competition and its central role in
fostering economy, efficiency, and continuous performance improvement.
The Panel held eleven meetings, including three public hearings in
Washington, D.C.; Indianapolis, Indiana; and San Antonio, Texas. In these
hearings, Panelists heard first-hand both about the current process,
primarily the cost comparison process conducted under Circular A-76, as
well as alternatives to that process. Panel staff conducted an extensive
amount of additional research, review, and analysis in order to supplement
and evaluate the public testimony. Recognizing that our mission was a
challenging, complex, and controversial one, the Panel agreed that a
supermajority of two-thirds of the Panel members would have to vote for
any finding or proposal in order for it to be adopted by the Panel.
Importantly, the Panel unanimously agreed upon a set of principles to
guide all sourcing decisions:
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Guiding Principles for Sourcing Policy
The Panel believes that federal sourcing policy should:
1. Support agency missions, goals, and objectives.
2. Be consistent with human capital practices designed to attract, motivate, retain, and reward a
high-performing federal workforce.
3. Recognize that inherently governmental and certain other functions should be performed by
federal workers.
4. Create incentives and processes to foster high-performing, efficient, and effective organizations
throughout the federal government.
5. Be based on a clear, transparent, and consistently applied process.
6. Avoid arbitrary full-time equivalent or other arbitrary numerical goals.
7. Establish a process that, for activities that may be performed by either the public or the private
sector, would permit public and private sources to participate in competitions for work
currently performed in-house, work currently contracted to the private sector, and new work,
consistent with these guiding principles.
8. Ensure that, when competitions are held, they are conducted as fairly, effectively, and
efficiently as possible.
9. Ensure that competitions involve a process that considers both quality and cost factors.
10. Provide for accountability in connection with all sourcing decisions.
In addition, a supermajority of the Panel agreed on a package of additional
recommendations. Chief among these was a recommendation that publicprivate competitions be conducted using the framework of the Federal
Acquisition Regulation (FAR). Although a minority of the Panel did not
support the package of additional recommendations, some of these
Panelists indicated that they supported one or more elements of the
package, such as the recommendation to encourage high-performing
organizations throughout the government. Importantly, there was a good
faith effort to maximize agreement and minimize differences among
Panelists. In fact, changes were made even when it was clear that some
Panelists seeking changes were highly unlikely to vote for the
supplemental package of recommendations. As a result, on the basis of
Panel meetings and my personal discussions with Panel members at the
end of our deliberative process, the major differences among Panelists
were few in number and philosophical in nature. Specifically,
disagreement centered primarily on (1) the recommendation related to the
role of cost in the new FAR-type process and (2) the number of times the
Congress should be required to act on the new integrated process,
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including whether the Congress should specifically authorize a pilot
program that tests that process for a specific time period.
The Administration’s
Proposed Changes
As part of the administration’s efforts to implement the recommendations
of the Commercial Activities Panel, OMB published proposed changes to
Circular A-76 for public comment in November 2002. The administration is
now considering the comments received as it finalizes the revisions to the
Circular.
I provided comments on the proposal to the Director of OMB this past
January. My assessment of the proposed revision concluded that in many
ways it is consistent with the sourcing principles and recommendations
adopted by the Commercial Activities Panel. In particular, the proposal
stresses the use of competition in making sourcing decisions and, through
reliance on procedures contained in the FAR, should result in a more
transparent, expeditious, and consistently applied competitive process.
The proposal should promote sourcing decisions that reflect the best
overall value to the agencies, rather than just the lowest cost. Importantly,
the proposed revision also should result in greater accountability for
performance, regardless of the service provider selected. Of course,
successful implementation will require that adequate resources and
technical support be made available to federal employees.
There are several areas, however, where the proposed revisions to the
Circular are not consistent with the principles or recommendations of the
Commercial Activities Panel. Specifically, these include the absence of a
link between sourcing policy and agency missions, unnecessarily
complicated source selection procedures, certain unrealistic time frames,
and insufficient guidance on calculating savings. I am confident that the
administration is carefully considering these and other comments on the
proposal, and look forward to reviewing the final product.
One area of particular importance for all affected parties is how the
government’s sourcing policies are implemented. In this regard, one of the
Panel’s sourcing principles was that the government should avoid arbitrary
numerical or full-time equivalent (FTE) goals. This principle is based on
the concept that the success of government programs should be measured
by the results achieved in terms of providing value to the taxpayer, not the
size of the in-house or contractor workforce. Although the proposed
revision of the Circular contains no numerical targets or goals for
competitive sourcing, this has been a controversial area in the past. It has
been our view that the administration needs to avoid arbitrary targets or
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quotas, or any goal that is not based on considered research and analysis.
Congress recently put this principle into legislation; a provision in the
recent consolidated appropriations legislation requires sourcing goals and
targets to be “based on considered research and sound analysis of past
activities”. 1
DOD’s Competitive
Sourcing Agenda
DOD has been at the forefront of federal agencies in using the A-76
process in recent years. After several years of limited use of Circular A-76,
the deputy secretary of defense gave renewed emphasis to the A-76
program in August 1995 when he directed the services to make
outsourcing of support activities a priority in an effort to reduce operating
costs and free up funds to meet other priority needs. This effort was
subsequently incorporated as a major component of the Defense Reform
Initiative, and the program became known as competitive sourcing—in
recognition of the fact that either the public or the private sector could
win the competitions.
Recently, DOD’s A-76 study goals have increased because of the
President’s Management Agenda, which includes competitive sourcing as
one of its five key government-wide initiatives.2 Under that program, OMB
directed agencies to directly convert or complete A-76 competitions on 15
percent of their 2000 Federal Activities Inventory Reform (FAIR) Act
inventories by the end of fiscal year 2003, with the ultimate goal of
competing 50 percent of the FAIR Act positions. However, we understand
that this broader goal may be subject to negotiations between DOD and
OMB. DOD’s ongoing A-76 efforts should permit it to meet OMB’s goal for
2003. However, a greater challenge remains for DOD to complete studies
on an additional 158,000 positions in the out-years (FY 2004 through FY
2009). This is double what DOD has been able to accomplish in the past
over a similar timeframe. For example, DOD completed studies on 71,000
positions between fiscal years 1997 and 2002, and found it increasingly
difficult to identify study candidates over time. DOD hopes to be able to
meet this larger goal through a combination of A-76 competitions and
other alternatives.
1
Consolidated Appropriations Resolution, 2003, P.L. 108-7.
2
In addition to competitive sourcing, the other initiatives are strategic management of
human capital, improved financial performance, expanded electronic government, and
budget and performance integration.
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DOD’s experience with competitive sourcing since 1996 contains
important lessons for civilian agencies as they implement their own
sourcing initiatives. As we have tracked DOD’s progress in implementing
its A-76 program since the mid to late 1990s, we have identified a number
of challenges and concerns with the program. They include (1) the time
required to complete the studies, (2) the resources required to conduct
and implement the studies, (3) selecting and grouping positions to
compete, and (4) developing and maintaining reliable estimates of
projected savings expected from the competitions.
The Department Can
Benefit From
Adopting Best
Practices
At the request of this Subcommittee, GAO has conducted a number of
engagements to identify best practices in the commercial sector for
addressing the sourcing and acquisition challenges facing the Department.
We believe the Department could significantly improve its performance in
a number of areas by adopting some of the best practices we have
identified.
Information Technology
Outsourcing
For example, we reviewed the practices used by leading companies
involved in outsourcing certain information technology (IT) functions. In
November 2001, we issued a guide on outsourcing IT services that
provides a generic framework of practices from leading commercial
organizations that can improve purchasing decisions and manage the
resulting government/provider relationship.3
At the further request of this Subcommittee, we have been reviewing the
extent to which selected DOD projects are using leading commercial
practices laid out in our November 2001 guide. We have shared our draft
report with this Subcommittee, which is currently with DOD for comment.
In brief, we found that the five projects in our review were generally
implementing these practices. This is a positive sign because although
implementing these practices does not guarantee the success of an
outsourcing project, our November 2001 study reflected a consensus view
that these practices were the most critical to success.4 Accordingly,
3
U.S. General Accounting Office, Information Technology: Leading Commercial Practices
for Outsourcing of Services, GAO-02-214 (Washington, D.C.: Nov. 30, 2001).
4
This consensus view was based on interviews with managers in leading commercial
organizations, discussions with academic and professional authorities, and extensive
research on IT acquisition practices.
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application of these practices increases the probability of a successful
outsourcing project.
Acquiring Information
Technology Systems
Since the 1990’s, DOD has spent billions of dollars each year attempting to
leverage the vast power of modern technology to replace outdated ways of
doing business. However, the Department has had limited success in
modernizing its information technology environment, and we have
designated DOD’s systems modernization as high risk since 1995.5 A major
reason for this designation is DOD’s inconsistent use of best practices for
acquiring IT systems.
We have categorized IT system acquisition practices into three groups and
apply leading practices, as appropriate, in our evaluations of systems
acquisitions within DOD. A brief description of the three categories and
what we have found at DOD follows:
Acquisition of systems in accordance with mature processes. Our work
shows that DOD’s implementation of mature acquisition management
processes is uneven, as are its proactive efforts to improve these
processes. For example, our review of the Defense Logistics Agency’s
system acquisition processes showed that one major system was following
mature processes, while another was not.6 We made recommendations to
correct these weaknesses, and DOD has generally concurred.
There are also published best practices for acquiring systems that are built
from commercial components. Generally, these practices advocate an
acquisition approach that is not driven primarily by system requirements,
but rather an approach that proactively manages the tradeoff among
various acquisition issues, such as the organization’s system requirements
and the commercially available system components. Accordingly, we have
ongoing and planned work at a number of federal agencies, including
DOD, which includes determining whether these practices are being
employed.
5
See U.S. General Accounting Office, High-Risk Series: An Update GAO-03-119
(Washington, D.C.: January 2003) for our most recent high-risk report.
6
U.S. General Accounting Office, Information Technology: Inconsistent Software
Acquisition Processes at the Defense Logistics Agency Increase Project Risks (GAO-02-9,
Jan. 10, 2002).
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Use of an enterprise architecture to guide and constrain system
acquisitions. Effectively managing a large and complex endeavor requires,
among other things, a well-defined and enforced blueprint for operational
and other technological change, commonly referred to as an enterprise
architecture. In May 2001, we reported that DOD had neither an enterprise
architecture for its financial and financial-related business operations, nor
the management structure, processes, and controls in place to effectively
develop and implement one.7 In addition, the National Defense
Authorization Act for Fiscal Year 2003 required DOD to develop such an
architecture by May 1, 2003, along with a transition plan for its
implementation. At the request of this Subcommittee, we reported last
month that DOD had taken a number of steps to address this issue, such as
establishing a program office responsible for managing the enterprise
architecture effort.8 However, the Department had yet to implement some
of the recommendations from our May 2001 report and commercial
leading practices for developing and implementing architectures.
Accordingly, we made additional recommendations related to DOD’s
architecture effort, with which DOD concurred.
Acquiring systems in a series of economically justified incremental
builds. Both federal law and guidance advocate the use of incremental
investment management9 when acquiring or developing large systems.10
Using these system investment practices helps to prevent discovering too
late that a given acquisition/development effort is not cost beneficial. We
have previously reported that certain DOD system acquisitions were not
utilizing incremental management best practices or were just beginning to
do so. For example, in July 2001 we reported that although DOD had
divided its multi-year, billion-dollar Standard Procurement System into a
7
U.S. General Accounting Office, Information Technology: Architecture Needed to Guide
Modernization of DOD’s Financial Operations, GAO-01-525 (Washington, D.C.: May 17,
2001).
8
U.S. General Accounting Office, DOD Business Systems Modernization: Improvements to
Enterprise Architecture Development and Implementation Efforts Needed, GAO-03-458
(Washington, D.C.: Feb. 28, 2003).
9
Incremental management involves three fundamental components: (1) acquiring a large
system in a series of smaller increments; (2) individually justifying investment in each
separate increment on the basis of cost, benefits, and risks; and (3) monitoring actual
benefits achieved and costs incurred on ongoing increments and applying lessons learned
to future increments.
10
Clinger-Cohen Act of 1996, P.L. 104-106, and Office of Management and Budget Circular A130 (Nov. 30, 2000).
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series of incremental releases, it had not treated each of these increments
as a separate investment decision.11
Acquiring Services
With respect to services acquisitions generally, we found that the
experiences of leading private-sector companies to reengineer their
approach to acquiring services offer DOD both valuable insights and a
general framework that could serve to guide DOD’s efforts. In January
2002, we reported that our work at six leading companies found that each
had reengineered its approach to acquiring services to stay competitive,
reduce costs, and improve service levels. These changes generally began
with a corporate decision to pursue a strategic approach to acquiring
services. Taking a strategic approach involve a range of activities from
developing a better picture of what a company was spending on services
to taking an enterprise-wide approach to procuring services and
developing new ways of doing business. Pursuing such an approach
clearly paid off, as the companies found that they could save millions of
dollars and improve the quality of services received.
DOD already has in place certain elements critical to taking a strategic
approach, such as the commitment by senior DOD leadership to improve
practices for acquiring services and to adopt best commercial practices.
Moreover, the fiscal year 2002 national defense authorization legislation
directs DOD to improve its management and oversight of services
acquisitions. To implement these requirements, DOD issued new policy in
May 2002 that was intended to elevate major purchases of services to the
same level of importance as purchases of major defense systems. The
Department still faces a long journey, however, as it begins to take on the
more difficult tasks of developing a reliable and accurate picture of service
spending across DOD.
Major Weapon Systems
Acquisitions
DOD relies heavily on its major weapons acquisitions to modernize its
forces and expects to spend on average about $150 billion annually over
the next 5 years for the research, development and procurement of
weapon systems. However, its history of acquiring major weapon systems
all too frequently has been characterized by poor cost, schedule, and
performance outcomes that have delayed delivery of new capabilities to
11
U.S. General Accounting Office, DOD Systems Modernization: Continued Investment in
Standard Procurement System Has Not Been Justified, GAO-01-682 (Washington, D.C.:
July 31, 2001).
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the warfighter and created significant opportunity costs that have slowed
the Department’s overall modernization efforts.
Because of the pressures in DOD’s acquisition environment to get new
acquisition programs approved and funded, many programs are initiated
with requirements that make a proposed weapon system stand out from
others. The systems engineering necessary to identify gaps between
requirements and resources is often not accomplished until after the
program is started. In these cases, performance requirements can outstrip
the resources—technologies, funding, time, and expertise—available to
meet them. This creates a need for immature, fledgling technologies that
are difficult to develop and usually results in unstable and incomplete a
product design for which there is insufficient time to mature before
starting production. Sufficient time or effort may not be available during
product development to understand the product’s critical characteristics
or to bring key manufacturing processes in control to meet cost, schedule,
and quality targets. In addition, there is not enough emphasis on building
in reliability and reducing total ownership cost.
Typically, the results of this process are weapons that have superior
performance, but that create longer-term collateral consequences such as:
•
•
•
•
•
•
Higher acquisition costs that reduce buying power and force tradeoffs
in other acquisitions,
Increased costs to operate and support weapon systems at required
readiness rates,
Significant delays in getting weapon systems to warfighters,
Reduced quantities,
Early obsolescence, and
A diminishing supply base for critical parts and components.
DOD understands that it must get better outcomes from its acquisition
process if it is to modernize its forces quickly within projected resources.
To that end, it is currently revising acquisition policies to emphasize an
evolutionary, knowledge-based process that incorporates best practices
proven by successful companies in developing complex new products. We
believe the policy changes, while not yet finalized, promise to be a good
first step in changing DOD’s acquisition outcomes. If implemented
properly, programs would face less pressure to deliver all of the ultimate
capabilities of a weapon system in one “big bang.” The new policy has
many positive features. For example, it:
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•
•
•
•
Separates technology development, which is unpredictable by nature,
from product development, which requires major investments and is
delivery-oriented;
Articulates the concept of a knowledge-based approach, providing
guidelines for achieving knowledge of technologies prior to beginning
product development, stability of the system’s design by about midway
through product development, and control over critical manufacturing
processes for building a weapon system prior to a production decision;
Places a greater emphasis on evolutionary product development, which
provides a more manageable environment for achieving knowledge;
and
Recognizes the benefits of best practices for product development
from leading companies in capturing knowledge at critical junctures
during product development.
While these policy changes represent tangible leadership action for getting
better weapon system acquisition outcomes, unless the policies are
implemented through decisions on individual programs, outcomes are not
likely to change. Both form and substance are essential to getting desired
outcomes. At a tactical level, we believe the policies could be made more
explicit in several areas to facilitate such decisions. First, the regulations
provide little or no controls at key decision points of an acquisition
program that force a program manager to report progress against
knowledge-based metrics. Second, the new regulations, once approved,
may be too general and may no longer provide mandatory procedures.
Third, the new regulations may not provide adequate accountability
because they may not require knowledge-based deliverables containing
evidence of knowledge at key decision points.
At a strategic level, some cultural changes will be necessary to translate
policy into action. At the very top level, this means DOD leadership will
have to take control of the investment dollars and to say “no” in some
circumstances, if programs are inappropriately deviating from sound
acquisition policy. In my opinion, programs should follow a knowledgebased acquisition policy—one that embraces best practices—unless there
is a clear and compelling national security reason not to. Other cultural
changes instrumental to implementing change include:
•
•
Keeping key people in place long enough that they can affect decisions
and be held accountable;
Providing program offices with the skilled people needed to craft
acquisition approaches that implement policy and to effectively
oversee the execution of programs by contractors;
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•
•
•
•
Realigning responsibilities and funding between science and
technology organizations and acquisition organizations to enable the
separation of technology development from product development;
Bringing discipline to the requirements-setting process by demanding a
match between requirements and resources;
Requiring readiness and operating cost as key performance parameters
prior to beginning an acquisition; and
Demanding reliability testing early in design.
Ultimately, the success of the new acquisition policy will be seen in
individual program and resource decisions. Programs that are
implementing knowledge-based policies in their acquisition approaches
should be supported and resourced, assuming they are still critical to
national needs. Conversely, if programs that repeat the approaches of the
past are approved and funded, past policies—and their outcomes—will be
reinforced.
Acquisition Workforce
Challenges
To effectively implement best practices and properly manage the goods
and services it purchases each year requires that DOD have the right skills
and capabilities in its acquisition workforce. This is a challenge given
decreased staffing levels, increased workloads, and the need for new skill
sets. Procurement reforms and the ongoing technological revolution have
placed unprecedented demands on the workforce, and contracting
personnel are now expected to have a much greater knowledge of market
conditions, industry trends, and technical details of the commodities and
services they procure.
In response to these challenges, DOD has made progress in laying a
foundation for reshaping its acquisition workforce. The agency has
initiated a substantial long-term strategic planning effort to identify the
competencies needed for the future and to address what reshaping of the
workforce will be needed to achieve the desired mix. DOD is continuing
with an effort to test various human capital innovations and has begun
making significant changes to its acquisition workforce-training program.
Part of this long-term effort will involve making a cultural shift as well as
developing better data to manage risk by spotlighting areas for attention
before crises develop and to identify opportunities for improving results.
Conclusion
The continuing war on terrorism, regional instability, demographic and
technological changes, as well as the federal government’s short-and longterm budget pressures have created a challenging environment for the
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Department of Defense. It faces a number of difficult missions that will put
its strategies, personnel, and resources under enormous strains.
Consequently, it is important for the Department to adopt business
practices that will enable it to acquire the systems and services to allow it
to operate effectively in this environment. Doing so will help ensure that
its resources are used in the most efficient manner possible. I am
confident that the leadership of the Department is committed to that
objective. Success over the long term will depend on the leadership
sustaining its commitment to improving business practices through a
strategic, integrated, and DOD-wide approach to ensure that these efforts
achieve their intended results.
Mr. Chairman, this concludes my statement. I will be pleased to respond to
questions from the Subcommittee.
(120228)
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